Comments on: New data leaves 130/30 brouhaha unresolved

By: Peter Zeuli

Peter Zeuli — Wed, 22 Apr 2009 19:34:21 +0000

Regarding the structure, I really don’t know if the exposure is correct but what I do know is that it isn’t the structure that determines performance it’s the strategy and the effective implementation of the strategy that determines performance. I do think that 130/30 was marketed incorrectly from the beginning because people interpreted it as an absolute strategy and it just isn’t – it is a relative strategy. Also the best performers (to the best of my knowledge) have come from the boutique firms not the big shops and I believe it is for one reason – too many restrictions being placed on managers at big shops resulting in missed opportunities.

We run a global, all-cap 130/30 on a limited-partnership basis but we are thinking about registering it as a 40 Act fund.

By: Rob

Rob — Wed, 22 Apr 2009 14:31:32 +0000

Interesting to note that over half of the fund families of which Morningstar is comparing to, is actually comparing against a strategy managed by a different portfolio manager. It seems to me that if you are going to compare a 130/30 to a long-only strategy, it would make sense to do so if both are managed by the same pm. Looking over the list there are some that are comparing quants to fundamentals, as well as completely different subadvisors against each other. While JPMorgan has been raising significant assets in this space, it is worth nothing that Morningstar’s endorsement comes as it is one of the few which is actually being compared against its direct long-only peer.

Also, for the beta’s they are taking strategies managed to the R1000V and R1000G, and comparing the beta to the S&P 500. The article appears to be rather targeted to achieve the authors objectives, and proves what some researchers have been saying with the difficulty in analyzing these strategies in the traditional fashion.

By: Walt French

Walt French — Wed, 22 Apr 2009 13:13:07 +0000

…the removal of the major outlier above (the second fund), bumps the median out performance into positive territory.

Yes, and Bush cut the deficit sharply if you take out just his 2003 tax change.

Also, the MStar article (the title of which, “130% Gimmick…” hardly seems “dispassionate”) failed to address the key issue in 130/30: the strategy is intended to give you benchmark return plus about two or three times as much of the manager’s active insights as a long-only portfolio. When the manager’s active insights are helpful, it will out-perform by that ratio; when non so insightful, under-perform by that ratio, compared to the long-only strategy. The tested period was one in which many active managers did poorly, so the extension strategies, IF WORKING AS DESIGNED, would also under-perform by more. Yes, there are costs of borrowing (not exactly real high these days) and inefficient borrowing markets, but there are offsetting efficiencies from being able to use more of your research in your portfolio — that small company that’s about to get tiny can make you some real money.

From talking to portfolio managers who run long-short, the issues raised by the MStar article are quite manageable or downright trivial; the real concern is the quality of the insights.

“Follow the alpha.”